Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

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, Volume 10 Issue 2 Previous Issue    Next Issue
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Hot Money Flows, Cycles in Primary Commodity Prices, and Financial Control in Developing Countries
Ronald McKinnon
Front. Econ. China. 2015, 10 (2): 201-223.

Abstract   PDF (6571KB)

Because the U.S. Federal Reserve’s monetary policy is at the center of the world dollar standard, it has a first-order impact on global financial stability. However, except during international crises, the Fed focuses on domestic American economic indicators and generally ignores collateral damage from its monetary policies on the rest of the world. Currently, ultra-low interest rates on short-term dollar assets ignite waves of hot money into Emerging Markets (EM) with convertible currencies. When each EM central bank intervenes to prevent its individual currency from appreciating, collectively they lose monetary control, inflate, and cause an upsurge in primary commodity prices internationally. These bubbles burst when some accident at the center, such as a banking crisis, causes a return of the hot money to the United States (and to other industrial countries) as commercial banks stop lending to foreign exchange speculators. World prices of primary products then collapse. African countries with exchange controls and less convertible currencies are not so attractive to currency speculators. Thus, they are less vulnerable than EM to the ebb and flow of hot money. However, African countries are more vulnerable to cycles in primary commodity prices because food is a greater proportion of their consumption, and—being less industrialized—they are more vulnerable to fluctuations in prices of their commodity exports. Supply-side shocks, such as a crop failure anywhere in the world, can affect the price of an individual commodity. But joint fluctuations in the prices of all primary products—minerals, energy, cereals, and so on—reflect monetary conditions in the world economy as determined by the ebb and flow of hot money from the United States, and increasingly from other industrial countries with near-zero interest rates.

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Analysis of Air Pollution Impact Factors in China: A MIMIC Modeling Approach
Jing Gao,Lei Zhang
Front. Econ. China. 2015, 10 (2): 224-251.

Abstract   PDF (390KB)

In this study, we investigate the impact factors on air pollution in terms of CO2, SO2 and NOx emissions simultaneously in China and compare changes in air pollution across provinces from 1998 to 2011 using a Multiple Indicators and Multiple Causes Model (MIMIC) within a Structural Equation Model (SEM) framework. Our findings reveal that GDP per capita and total population have the largest impacts on air pollution, followed by energy intensity, foreign direct investment, population density, and industrialization. The results also reveal that the inverted U-shaped Environmental Kuznets Curve (EKC) hypothesis exists in China. Our findings also demonstrate that Shandong, Jiangxi and Liaoning are the top three provinces with the most deteriorated air quality while Xinjiang, Fujian and Ningxia are with the best. These results not only contribute to advancing the existing literature, but also merit particular attention from policy-makers in China.

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The Choice of Technology and Equilibrium Wage Rigidity
Haiwen Zhou
Front. Econ. China. 2015, 10 (2): 252-271.

Abstract   PDF (275KB)

In this general equilibrium model, firms engage in oligopolistic competition and choose increasing returns technologies to maximize profits. Capital and labor are the two factors of production. The existence of efficiency wages leads to unemployment. The model is able to explain some interesting observations of the labor market. First, even though there is neither long-term labor contract nor costs of wage adjustment, wage rigidity is an equilibrium phenomenon: an increase in the exogenous job separation rate, the size of the population, the cost of exerting effort, and the probability that shirking is detected will not change the equilibrium wage rate. Second, the equilibrium wage rate increases with the level of capital stock. Third, a higher level of capital stock does not necessarily reduce the unemployment rate. That is, there is no monotonic relationship between capital accumulation and the unemployment rate.

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Information Linkages between Chinese and World Copper Futures Markets
Keqiang Hou,Luke Chan,Xin Zeng
Front. Econ. China. 2015, 10 (2): 272-300.

Abstract   PDF (1155KB)

In this paper, we examine the price discovery process and volatility spillover effects in informationally linked futures markets. Using synchronous trading information from the Shanghai Futures Exchange (SHFE), the New York Mercantile Exchange (NYMEX), and the London Metal Exchange (LME) for copper futures from 2000 to 2012, we show that the cointegration relationships of these futures markets changed during 2006–2008. The results indicate that there is a bidirectional relationship in terms of price and volatility spillovers between the LME and NYMEX and the SHFE, with a stronger effect from the LME and NYMEX to the SHFE (versus the effect from the SHFE to the LME and NYMEX) prior to 2006. Our results also highlight the increasingly prominent role of the SHFE in the price formation process and cross-volatility spillover effects since 2008. Finally, we show that volatility spillover has important implications for constructing optimized portfolios for copper investors.

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Heterogeneous Firms in Importing: Theory and Evidence from China
Yuting Chen
Front. Econ. China. 2015, 10 (2): 301-334.

Abstract   PDF (998KB)

In this study, I explore the effects of the financial status of firms on its decisions to import. The import decision is reflected in various aspects, such as whether to import or buy from home market; what types of goods to import, etc. A novelty of this analysis is that I distinguish between ordinary trade and processing trade, which involves importing inputs to be assembled and re-exported. Several novel patterns emerge. Firstly, a firm’s financial status, especially its liquidity, significantly influences its decisions to import. Secondly, regional financial development also has a significantly affect importing decisions. However, a firm’s creditworthiness and regional factors work independently (i.e., regional financial development does not alleviate a firm’s credit constraints). The findings yield implications for developing economies which demand technological spillovers from advanced markets and those which maintain large trade surpluses with the developed economies.

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Is the Phillips Curve Valid in China?
Yang Ji,Ran Li,Jingxian Zou
Front. Econ. China. 2015, 10 (2): 335-364.

Abstract   PDF (2191KB)

Is the “non-existence” of the Phillips curve in China a truth or just an illusion due to the deficiency of data? Should policy analysis follow the light of New-Keynesian or New-classical economics? These questions require empirical work on the Phillips curve, which has long been limited in China due to an inaccurate unemployment rate and unreliable estimated output gap. Instead of the insignificant or self-contradicting results in previous work, this paper puts forward a significant estimation, creatively using the vacancy-jobseeker ratio instead of the unemployment rate. It is suggested that a robust Phillips curve cannot be ignored and New-Keynesian economics should be employed in policy analysis in the short run.

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Macroeconomic Uncertainty, Fund Demand and Corporate Investment
Yizhong Wang,Frank M. Song
Front. Econ. China. 2015, 10 (2): 365-391.

Abstract   PDF (1761KB)

Using a unique set of data on fund use by China’s listed companies, this paper examines how macroeconomic uncertainty works on corporate investment. The study shows that macroeconomic uncertainty affects corporate investment behavior through the three channels of external demand, liquidity demand and long-term fund demand. However, the result is influenced by expectations and can differ across firms depending on their economic cycle, shareholder character, industrial character and the financial constraints they are exposed to. Specifically, high macroeconomic uncertainty can weaken the positive roles of these channels, especially those of external demand and liquidity demand, in driving corporate investment. During economic upturns, the effect of these channels is the most evident among state-owned firms, manufacturing firms and low cash dividend firms. The lessons from this study are that macroeconomic policies should be leveraged taking account of the channels through which economic shocks find their way, and monetary policies have to be implemented by targeting microscopic fund demand.

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